The Latest Car Insurance Trend: Pay As You Drive

Jacqui Kenyon

January 15, 2014

Do you consider yourself a good driver?

Would that answer change if someone asked you whether you'd be willing to be monitored in order to prove it?

If your answer is still yes, it may be worth your while to sign up for pay-as-you-drive car insurance, also known as usage-based insurance. With this type of plan, you attach a device to your car that tracks how you drive—including how often you speed to how hard you jam the brakes—and calculates what you pay based on your good or bad habits.

DailyFinance reports that many car insurance companies—including giants like Progressive, Allstate and Travelers—are offering pay-as-you-drive, which can come with discounts of 20% to 50% off what you'd pay for traditional car insurance.

Who Could Benefit ...

People who work from home. The lower the mileage on your car, the better off you'll be. So if your commute is just up the street—or just from your bed to your desk—you could reap a lot of savings from switching plans. The same goes for city-dwellers who typically take public transportation but use their cars every once in a while.

Parents of teen drivers. Some of the monitoring devices—though not most, by any means—have a GPS component that allows you to track your driving patterns. Some people may be skeptical of this "Big Brother" situation, but parents trying to teach (or scare) young drivers into safer driving habits may find this feature useful.

Non-speeders (or slight speeders). Frequent speeding would decrease your savings from a pay-as-you-drive plan, but if you're cruising at 10 miles per hour above the limit, the device won't register it. For example, Allstate's device only records speeding when you're traveling at 80 miles per hour or above.

Some company spokesmen have tempered expectations by saying that there is only potential for savings if you adopt pay-as-you-drive plans. But, at the very least, you won't end up paying more than with a traditional plan—so what have you got to lose?

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LearnVest Planning Services is a registered investment adviser and subsidiary of LearnVest, Inc. that provides financial plans for its clients. Information shown is for illustrative purposes only and is not intended as investment advice. Please consult a financial adviser for advice specific to your financial situation. LearnVest Planning Services and any third-parties listed, discussed, identified or otherwise appearing herein are separate and unaffiliated and are not responsible for each other’s products, services or policies. LearnVest, Inc. is wholly owned by NM Planning, LLC, a subsidiary of The Northwestern Mutual Life Insurance Company.